Although stockbroker misconduct is essentially a misuse of power or position, there are a variety of different ways in which stockbrokers or financial advisors can breach their duties and cause their clients to lose money. The following types of misconduct demonstrate a breach of duty on the part of the advisor and violate investor rights.
Unsuitability refers to an investment advisor's failure to make recommendations based on a client's individual needs, goals and willingness to incur risk. Brokers have a legal duty to thoroughly assess the needs of their clients, and then make appropriate and fair recommendations.
Stock market loss as a result of unsuitability is one of the most common investment claims. A broker must determine the customer's financial condition, level of knowledge and experience, investment objectives, risk tolerance, age, income, spending needs, and only recommend investments that are appropriate for the customer's circumstances. What is a suitable investment for a successful doctor will likely be grossly unsuitable for a retired widow living on a pension. For example, in one of my cases, a broker recommended investing the majority of a retired widow's life savings in high risk tech stocks and the widow lost over $200,000. We filed suit claiming that the broker violated his duty to recommend suitable investments. The case quickly settled for a very sizable amount.
A broker may induce a customer to buy or sell a stock by making statements or representations of facts that are known by the broker to be untrue, and are relied upon by the customer following the broker's recommendation. Also, a broker can commit fraud by an "omission" -- failing to reveal important facts that would have been important to the customer in making the investment decision. Sometimes the broker will falsely state, "I have an inside tip" or "You should buy this stock - I know I am buying it." For example in one of my cases a broker guaranteed my client against loss in a variable annuity. However, my client lost almost $250,000. We settled this case for a substantial sum of money.
Pyramid schemes, also known as "Ponzi Schemes," rely on investors to contribute an initial investment, usually promising a high interest rate. In reality, the interest is paid from funds contributed by new investors. The cycle continues creating a large tier of investors who are supposedly all profiting. Eventually new investors cannot be found and the ponzi scheme collapses. Ponzi schemes are built up around false promises and a system that only rewards the schemer. We have recovered very large sums of money from the brokerage firms who employed the brokers running the Ponzi schemes.
Excessive trading or "churning" occurs when a broker makes an excessive amount of trades both in frequency and volume of purchase and sales. Why would a broker churn your portfolio? Your broker is normally paid a commission for each "buy" and "sell" regardless of whether your investment makes money or tanks.
For example in one of my cases, an elderly lady's account was excessively traded by her broker, who was the son of one of her friends. The broker earned $14,000 in commissions in just nine months and my client lost over $100,000. This case also settled for a significant sum of money.
In simple terms, a fiduciary duty is defined as, "An obligation to act in the best interest of another party." When one person undertakes to act for another in a fiduciary relationship, the law forbids the fiduciary from acting in any manner adverse or contrary to the interests of the client, or from acting for his own benefit in relation to the subject matter. The client is entitled to the best efforts of the fiduciary on his behalf and the fiduciary must exercise all of the skill and diligence at his disposal when acting on behalf of the client.
Courts across the country have expressly held that a fiduciary duty exists between a stockbroker and his customer. The court in Duffy v. Cavalier, 215 Cal.App3d 1517 (1989) held that all brokers are fiduciaries in California.
Brokerage firms are required by law to appropriately supervise and regulate their brokers and financial advisors, and to regularly review the activities of their employees. When an employee of a brokerage firm is found to be guilty of stockbroker fraud, the brokerage firm may also be held liable for investor losses.
The best way to determine whether you may have a valid claim is to talk to a lawyer who is knowledgeable and experienced in representing investors. Many people with good claims fail to recover their money simply because they incorrectly decide, without qualified advice, that their losses are their own fault, or that their claims will fail for one reason or another.
Do not be embarrassed or ashamed, stockbroker misconduct is not your fault! Act now and call investment fraud and ponzi scheme attorney Thomas C. Bradley at 775-323-5178 for your free consultation and free review of account statements. Remember, we don't get paid until you do. Mr. Bradley assists investors in San Francisco, Sacramento, Oakland, California and Reno, Nevada.